That only means that people attached differing probabilities to the return of physical convertibility. Both the pound and the dollar stayed financially convertible throughout the suspension, which made physical convertibility much less relevant.

You need to study your history a little more. Up until Nixon broke with gold the government always dangled the expectation that we would return to a sound more before us. Nixon took all that away. Those in government have not expressed returning to gold.

When the UK suspended 1797-1821 it was always with the expectation they would return to gold. Had they made the same decision as Nixon the pound would have crashed.

And incidentally because the UK returned to gold and cut taxes they became the dominant economic power in the 19th Century.

Say, will you “deposit” some major cash with me? I have all kinds of “assets” to back up the notes I’ll give you in return. I can have any kind of assets you want (so long as they’re all paper).

How does any of this bear any resemblance to the situation where there is a 1-to-1 redemption? Who are you to substitute your estimate of value for theirs? What makes you think that the price of the ounce of silver (or dare I say, the dollar of silver, which is what the Thaler once was) on the open market will be equivalent to the redemption value?

You seem to have some kind of mental block against comprehending the existence and operation of risk and forecasting, as though you want to take all of the bank runs and failures that have every actually happened and wish them away.

I imagine it’s not irrelevant to the holders of the notes.

Don’t get me wrong, there is nothing wrong with holding some gold- it is the ultimate monetary insurance against a complete financial collapse or a runaway inflation, but don’t do it thinking you will get incredibly wealthy if and when the price goes to $10,000/ounce. Other real products and real assets- the things you would exchange your gold for- will also be rising in prices denominated in dollars.

They didn’t “suspend it for 74 years.” They suspended gold redemption permanently. The fact that it’s been 74 years since that was done is immaterial. The fact remains that governmental seizure of the monetary system has altered the expectations of all market participants indefinitely.

In other words, the difference between a bank’s suspending convertibility for a weekend and FDR’s action is the same as the difference between being asleep and being dead.

Please tell me that was a joke.

That’s true – but there was never a coin of that weight. If you wanted to pay someone a pound in coins, you’d use several coins of lesser weight, not a “one pound coin”.

Whether a pound consisted of 16 oz in those days I don’t know.

A pound is now, and has always been, 12oz.
(The word “ounce” comes from the Latin word for “one twelfth”; the Troy ounce being 1/12 of a pound makes a lot more sense than the avoirdupois ounce being 1/16 of a pound – I don’t know how that came about. FWIW, a troy pound is lighter than an avoirdupois pound, too – but a troy ounce is heavier than an avoirdupois ounce)

You are confusing backing with convertibility. A dollar might be backed and convertible into 1/35 oz of gold, but on weekends the bank is closed and the dollar is inconvertible. Over the weekend the bank still has the same assets as before, and the dollar is still backed. The dollar has been inconvertible since 1933, but the fed still has the gold and bonds it had then. The difference between suspending convertibility for a weekend and suspending it for 74 years is only one of degree.
Furthermore, the dollar is not physically convertible (the bank will not buy back a dollar for 1/35 oz.) but it is financially convertible (the bank will buy back a dollar with a dollar’s worth of bonds) As long as the fed maintains financial convertibility, physical convertibility is irrelevant. Clearly, anyone who has ever used dollars to buy bonds from the fed has exchanged a dollar for an asset.

Anthony,

Sorry it took me so long to get to your request. If you have not read The Theory of Money and Credit I recommend it highly. Most of the book is dedicated to the determination of the value of money.

In TM&C Mises defines money as simply a medium of exchange. Such a medium can be anything that is accepted in third party exchange and the value attributed to it is determined by those who present it and those who accept it in exchange.

Now concerning the value of money Mises states in Chapter 11 section 3:

All determinants of prices have their effect only through the medium of the subjective estimates of individuals; and the extent to which any given factor influences these subjective estimates can never be predicted. Consequently, the evaluation of the results of statistical investigations into prices, even if they could be supported by established theoretical conclusions, would still remain largely dependent on the rough estimates of the investigator, a circumstance that is apt to reduce their value considerably. Under certain conditions, index numbers may do very useful service as an aid to investigation into the history and statistics of prices; for the extension of the theory of the nature and value of money they are unfortunately not very important.

Mises is saying that the value of money has so many components and the components are so variable that one can never know their impact on the value of money from moment to moment or from component to component. This totally refutes the monetarist view that a constant supply of money, or a constant increase in the supply of money, will always keep the value of money constant. It also refutes the Supply Theorists who say that an increase in money supply will always result in inflation and a decrease in the money supply will always result in deflation. The value of money is subjective not objective.

But the value of money is subject to marginal utility so one can say in a general way that an increase in the supply will decrease the marginal utility of money and so its value will decrease but this cannot be accurately measured.

The reason I make this point is that no one can manage the value of money and the theories of the academic economists who attempt to use the FED to manage money value will always fail because they simply do not have the tools to know what they are doing. No one does.

So are we lost with no solution? No!! We do have a solution. If money is defined in terms of a monetary commodity that will reflect the various components that affect the value of money then we do not need to know all the components of money value. The obvious solution is to use the commodity that has been recognized for thousands of years as the foundation of a monetary system. That commodity is gold. I will not go into all the reasons gold is the best monetary commodity. That can easily be found.

Now if the monetary unit, which we can call a dollar, is defined in terms of gold because gold is the most consistent commodity the dollars value will be consistent. Other commodities that fluctuate due to weather, rot, or rust can fluctuate around gold and by extension the dollar, but the dollar itself will remain stable, as good as gold. With a gold-based dollar you can see the change in marginal utitlity by watching the dollar-gold exchange value. Say that 400 dollars will exchange for one ounce of gold, the monetary authority can issue money substitutes (gold certificates for example) based on the defined dollar 400 per ounce of gold. If the dollar price exceeds 400 per ounce of gold on the open market a quantity of dollars can be removed from the economy until the marginal utility of the money substitute returns the exchange value to 400. Likewise if the price falls money can be added to decrease the marginal utility. This will keep the dollar in a very narrow range of value based on the stability of gold and the marginal utility of money substitutes. If changes in economic activity or population or other changes the demand for dollars it will be reflected in the exchange value of the dollar substitutes and the supply can be adjusted properly.

I hope this explains a little.

One quibble, and one disagreement:
1) Coins can be of slightly different weights and still circulate, since most people don’t distinguish weight differences in the neighborhood of 2% or less. But the clippers and sweaters keep up their work (which is theft) and the coins continue to lose weight.

Just as counterfeiters do not invalidate the use of money in exchange those clipping and sweating gold coins would not invalidate their use. Just as counterfeiting has limits so do clipping and sweating. One who intentionally misrepresents a media of exchange is guilty of fraud and should be prosecuted by the state. Taking your argument to its logical conclusion all economic activity is invalid because of crime. Again, I believe your argument is a red herring.

2) The dollar is not fiat money. There is no such thing. The dollar, like all goveernment paper money, is backed by the assets of the central bank that issued it. Otherwise you’d have to wonder why all central banks bother taking assets in exchange for the money they issue.

I suggest you read a dollar bill. The dollar is not backed by any asset. If you doubt this I suggest you try to take a dollar to the Treasury Department and exchange it for an asset.

The FED can loan dollars to banks to satisfy the FFR without receiving any asset in return. They could set the interest rate to zeor then simply create money at will and distribute it to the banks to cover their reserve requirements.

While the discount window does have an asset requirement. The only restraint on the FED concerning the issuance of fiat money is their own internal procedures which can be changed with a simple vote of the governors.